30 Apr How Biden New Tax Plan Will Affect US Expats and What You Can Do About It
With Joe Biden having been sworn in as the 46th President of the United States three months ago, it is no surprise that changes to the US tax policy are imminent. Joe Biden has recently released his new Made In America tax plan, which comes with multiple changes to the tax system that will affect all Americans, none more so than those living and working abroad.
This proposal has been made by Biden’s team adhering to a number of principles that they hope to meet. These principles include:
- Collecting sufficient revenue to fund critical investments;
- Building a fairer tax system that rewards labour;
- Reducing profit shifting and eliminating incentives to offshore investment;
- Ending the race to the bottom around the world;
- Requiring all corporations to pay their fair share; and
- Building a resilient economy to compete.
US Citizens, regardless of whether they are living in the US or abroad, are required to file a tax return every year if their income exceeds the filing threshold. The threshold depends on the individual’s status. US Expats are also expected to report investments they hold abroad and bank account balances.
If you are a US Expat, the amount you could be expected to pay upon filing your tax return may change in the wake of Biden’s new tax plan. Below is a comprehensive breakdown of proposed changes that if passed by congress will soon come into effect.
An Individual’s Tax
If you qualify to pay tax, some of the changes introduced in Biden’s proposal could have a direct effect on you. These changes are mostly targeted towards high earners.
When President Trump passed the Tax Cuts and Jobs Act in 2017, he set the income tax bracket at 37% and the estate and gift tax at 40%. The new Made In America proposal would change that, raising taxes back to their previous levels. Specifically, the current income tax bracket would be raised to 39.6% from the previous 37%, whilst the current estate and gift tax would be raised to 45% from 40% and the exemption of $11.58 million would be decreased to $3.5 million.
There are exemptions available to US Expats that could reduce the amount of tax payable on income, if not totally exclude it. This includes foreign tax credits or the foreign earned income exclusion. You should consider whether you qualify for either of these as it could significantly reduce the amount of tax that you are liable to pay. If you would like to get an expert’s opinion on which exemptions you qualify for, it may be worth your while contacting a tax advisor or consultant that specialises in US expatriate tax matters.
Changes To Corporate Tax
Biden’s new tax plan not only proposes changes to an individual’s tax but also to corporations. The Made In America proposal opts to raise corporate tax from the current 21% to 28%. Naturally, this will affect all businesses; however, US Expats who have a foreign business will be particularly affected.
The new plan does not just raise corporation taxes but also proposes the elimination of The Global Intangible Low Tax Income. This can currently be used by US Expats with foreign businesses under certain conditions to reduce rates of tax by up to 50%. In Biden’s tax plan, with the proposed elimination of this discount, American-owned Foreign Businesses could effectively have to pay double the rate of tax.
FATCA
When Biden was Vice President, the Foreign Account Tax Compliance Act was passed, which gave the IRS permission to globally enforce tax. This led to a lot of US Expats unable to get any kind of financial or banking services and the new tax plan does not contain anything that sets to provide relief to US Expats in relation to FATCA.
What Should You Do Next with Biden’s New Tax Plan?
The proposal, as it stands, is exactly that – a proposal. We are currently awaiting further information as to whether these changes will ever come into force, to do so, they will need to be approved by congress.
You should keep an eye on the progress of the proposal and if when it comes to filing your taxes you would like the help of an expert, there are plenty out there who specialise in US expatriate tax matters available to contact.